Executive Compensation, Treasury Reforms, and the Consequences of the Delaware Model

In the aftermath of President Obama's description of the payment of bonuses by companies participating in the bailout as "shameful," Treasury has rushed out new standards.  One of them required boards to set out policies with respect to the approval of luxury expenditures.  As the standard described:

• Require Board of Directors’ Adoption of Company Policy Relating to Approval of Luxury Expenditures: The boards of directors of companies receiving exceptional assistance from the government must adopt a company-wide policy on any expenditures related to aviation services, office and facility renovations, entertainment and holiday parties, and conferences and events. This policy is not intended to cover reasonable expenditures for sales conferences, staff development, reasonable performance incentives and other measures tied to a company’s normal business operations. These new rules go beyond current guidelines, and would require certification by chief executive officers for expenditures that could be viewed as excessive or luxury items. Companies should also now post the text of the expenditures policy on their web sites.

What is extraordinary about this requirement is that it had to be required at all.  It has taken the federal government to tell boards that they must have policies in this area.  Why is that?  Shouldn't this already be the requirement?  It isn't. 

The standards for board behavior are set by Delaware and the Delaware courts.  The standards are abysmally low.  One need only read the Disney case to see that.  The need for these standards more than anything else in the Treasury proposal shows why corporate governance standards, specifically in the area of executive compensation, cannot be left to a court in a small state that has economic incentives to favor the board over shareholders.